(NASDAQ:AAPL) broke down from its long-term uptrend in November 2012. With its price at $400, my firm wasn't surprised, but most analysts still are. Apple is now very close to our target price and may be foreshadowing a decline in the broader markets.
It seems like everyone is focused on Apple's earnings right now, just as they were in September 2012 near its price peak. Remember in 2012 when Apple's price was approaching $700 and analysts were calling for $1100, $1500, and even $1,650?
We do. (See the timeline below).
Currently Apple’s price is around $400 and well below the “expert” analysts’ consensus price targets (which, after six months, was finally lowered to below $600, but still is almost 50% away from Apple’s current price). My guess is that it is only a matter of time before those experts chase price lower again, ratcheting down those targets in line with price reality.
Much More Effective
Even after its extreme decline, Apple still represents a large amount of the Technology SPDR ETF
(NYSEARCA:XLK) and the Nasdaq 100
(NASDAQ:QQQ). No doubt it remains very important to the markets and many ETFs.
Apple is a wonderful example of how price is the only true leading indicator and can be used to help you get out of the way before disaster strikes. Following price in Apple warned us of a trend change to down in October.
In a research piece titled “Is Apple’s Stock in a Bubble?”
written on October 5, 2012, I warned, “Apple is in a decade long uptrend, but if price were to fall below $600, that would be a sign that the four-year uptrend in Apple has changed to negative.”
This breakdown occurred the next month in early November, and there has been no turning back as investors continue to head for the exits and Apple fell another 30%+ from that $600 price. When everyone else was focused on lagging earnings, we were focused on what investors really care about: price.
Using similar techniques should also help us get out of the way of another, potentially larger, pending disaster (discussed below). In the meantime, Wall Street continues to “Buy” and “Hold” Apple shares as the next section outlines.
Traditional Wall Street “Wisdom”
The next chart pretty much sums up the major problem of trusting Wall Street for “wisdom.” It would have lost you 40%+ of your money as almost all analysts were completely unprepared for what would happen next (and frankly they still have no idea why Apple's price fell so hard).
In April 2012, when Apple’s price was $600, 87% of Wall Street Analysts had a buy recommendation for its shares. Many were expecting $1,000 as a given, and many hedge funds -- even ones that were focused on energy (anyone see an issue here?) -- held shares in Apple, providing their “expert” opinions on why it will hit $1,000.
In September 2012, those same analysts continued to buy Apple and continued to raise price targets as outlined by the timeline above.
Since then, Apple’s shares have fallen over 40%, but Wall Street hasn’t admitted that there is a problem.
80% of analysts never even came off their "buy" rating on the stock, continuing to suggest buying, and losing, all the way down.
We knew better. Where Is Apple Headed?
Looking at a zoomed in chart of Apple, we can see a major technical pattern that helped identify its top. Combining that pattern with the extremely bullish sentiment helped identify the negative potential in the stock.
The left shoulder in April 2012, the head last fall, and then the right shoulder formed in the November 2012 rally broke down at the turn of the year.
The reason Apple sold off so much is investor psychology. Anyone that wanted to buy Apple already had, and all that remained were potential sellers that wanted to protect profits. This is a recipe for a swift decline, similar to the recent one with gold (NYSEARCA:GLD) and silver (NYSEARCA:IAU).
Apple continues to sell off toward its head-and-shoulders target, but it hasn’t caught us by surprise as we were able to take advantage of Apple’s March bounce with short term profit taking at its $460 price peak .
On March 24, when Apple’s stock was at $462, we advised, “It is expected that this resistance will hold and Apple will resume its downtrend farther into the blue support zone where its head and shoulders target resides @ $360. The February price rise looks to have filled the gap formed at the January neckline breakdown. This adds value that the head and shoulders pattern may be legit and the target at $360 should be respected.”
Apple has since fallen as low as $385 on its way down to that target.
For broader market holders, though, a similar topping pattern may also be forming on the Nasdaq large cap index, and that is a big warning sign.
The Nasdaq 100 Is Reflecting Apple’s Chart
The next chart along with commentary, key price levels, and trade setups was provided with the warning, “A break of this level will also be a long term short signal as it confirms the pattern. We will cross that bridge if/when it occurs.”
Not only is the media following the same script for the broader market that it did during Apple’s peak, but the charts are also showing similar topping patterns.
The pattern is a big warning sign that the Nasdaq
(NYSEARCA:IYW), and other equity markets such as the S&P 500
(NYSEARCA:SSO), Dow Industrials
(NYSEARCA:DOG), and Russell 2000
(NYSEARCA:IWM) could be setting up to follow Apple’s lead to the downside.
The good news is there are specific price levels that will tell us if the pattern is indeed playing out on the QQQ and other tech focused ETPs (NYSEARCA:TYH), just as it did in Apple.
We will also know this long before most “expert” analysts catch on to the trend change.
Editor's note: This story by Chad Karnes, CMT originally appeared on ETFguide.com
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